With the average mortgages lasting for more than 25 years, a lot can happen in that time.
You may still be paying off your existing home after only living in it for a few years before your family grows and you need extra space. Or, you may need to move away for work. Your mortgage should never be a barrier to living your life.
But can you sell a house with a mortgage?
Selling a house with a mortgage is very common, and it happens more frequently than you might imagine.
Here’s what you need to know about selling and buying a home while you still have an existing mortgage.
What Happens to Your Mortgage When You Sell Your House?
Many of the concerns that spring up when selling your home while you still have a mortgage will relate to the amount of equity that you have in the property.
Ideally, when you sell your home, you will have enough equity stored up to pay off the loan balance, cover any closing costs, and make a profit. Once the closed, the money from the sale of the home will pay off any remaining balance on the loan.
If you are selling the house after 1 year, check with your lender to make sure that there are no penalties for doing so.
What is Equity and Why is it Important?
Equity is the amount of property that you own as a cash value. This is the amount that you would earn from the sale of your home, after repaying the balance of your mortgage loan and deducting all fees related to the sale.
There are two types of equity:
Home Investment Equity
This form of equity relates to the money that you have put into the property since purchase. It will include your deposit, all previous monthly mortgage repayments, and the cost of upgrades you have made.
Changes in the housing market along with any improvements that you’ve made, may affect the value of your home. If your home is now worth more than when you bought it, this will be your earned equity.
This figure can only be measured when selling your home.
What Happens if Your Home is in Negative Equity?
Being in negative equity is also known as being underwater. When you are in negative equity, the value of your home is often lower than it was when you bought it, and you owe more than it’s current market value.
In this situation, you will ideally want to wait until the market improves before selling the property, or look for ways to increase its value.
If you do not have the equity in the property to repay the loan, but you have no choice but to sell it, you may be allowed what is called a short sale. This is where the lender agrees to let you sell the home for less than you owe on it. This will result in a loss for them.
In the instance of a short sale, it will very likely affect your credit score and your ability to buy a new home in the future.
Finding out How Much Is Left on Your Mortgage
Get in touch with your mortgage lender to find out the payoff amount for your loan.
You will need to remember that the payoff amount will be different from the remaining balance on the loan that you would see on your mortgage statement. This is because the payoff amount will include accrued interest right up to the closing date, meaning it is a more accurate figure.
Once you get a payoff quote, this is usually valid for a set period which can typically be up to one month.
A payoff quote can be helpful if you are still a while off from selling your home. This will allow you to get an estimate of the potential profit from selling your home.
Do I Need to Renovate Before Selling a House With a Mortgage?
If you have enough equity stored in your property, you may be best off selling your house as is. This will help cut down the time, money, and effort you might have otherwise spent on carrying out work to the property.
Get a valuation on the property as it currently stands and find out how you are looking in terms of equity. If you need to make improvements to improve the value, consider only doing those that will provide the largest returns on investment.
If you carry out expensive work on the home, and it doesn’t add considerably more value than the money you have spent, then this is not helpful.
Selling and Buying at the Same Time
If you’re trying to both buy and sell a house at the same time, the easiest route is to sell first and buy second.
By doing this, you’ll have the payout for selling your existing property which you can use to make a downpayment on your new home.
When you are buying first, things can get a little more complicated. As you won’t have the money from your existing home to use as a downpayment, you’ll have to do one of three things.
- Use a home sale contingency. This is something that is included in your offer on your new home. It is a clause that allows you to get out of the contract if you are unable to find a buyer on your existing property.
- Take out a short-term bridge loan which will be used to pay off your mortgage. Once your old is sold, you can use the money from the sale to repay the bridge loan.
- Take out a second mortgage. If you can afford to do this, it can save a lot of stress.
The option that you choose may depend on your current credit score.
Don’t Be Put off Making the Sale
Selling a house with a mortgage needn’t be something that you need to worry about. It is a common occurrence that, if handled well, it will all go to plan.
Check with your mortgage lender to find out your payoff amount before committing to the sale and pay attention to the equity that you have stored in the property.
For more useful articles, check the rest of the blog.